U.S. Case Against 2 Lawyers Appears to Falter

For the influential class-action lawyer William S. Lerach, the news that arrived late last Friday was a step closer to vindication.

Mr. Lerach and a former partner, Melvyn I. Weiss, were informed by government investigators that no charges would be filed against them for now in a five-year-old inquiry into allegations that the two used illegal tactics in shareholder lawsuits, lawyers involved in the case said yesterday.

That was welcome relief for the two lawyers. But Mr. Lerach, Mr. Weiss and the law firm they once ran together remain under investigation, people close to the case say.

"I was informed by the government on Friday that Mel Weiss will not be included in any indictment that the government may seek to bring at this time," said Benjamin Brafman, a criminal defense lawyer representing Mr. Weiss. A call to Mr. Lerach's lawyer, John W. Keker, was not returned, but people close to the investigation said that Mr. Lerach received a similar message.

And the government could still indict Milberg Weiss itself, lawyers involved in the case said. That could put the firm out of business, send its casework into disarray, and land its 120 lawyers on the street. The lawyer representing the law firm, William W. Taylor III of Zuckerman Spaeder in Washington, would not comment on the investigation.

Richard Robinson, the United States attorney in Los Angeles, who is overseeing the case, would not comment on any cases he is currently pursuing.

To those close to the case, the indications that prosecutors may be focusing on Mr. Schulman and Mr. Bershad suggest that they continue to have a hard time building a case against the two individuals who have always been the prime targets of the investigation: Mr. Lerach and Mr. Weiss.

Brash and hard charging, Mr. Lerach, who is based in San Diego, is one of the country's premier class-action plaintiff's lawyers. In 2004, after a bitter fight with Mr. Weiss, Mr. Lerach formed his own firm.

Mr. Lerach has led attacks on many high-profile corporations, including AOL Time Warner, Dynegy, Qwest and WorldCom, often getting big settlements for investors who accused executives and their financial advisers of misleading stockholders in ways that cost them billions of dollars.

As lead counsel in the shareholder lawsuit against Enron, Mr. Lerach has already brokered record settlements with several Wall Street banks and brokers, including Citigroup and J. P. Morgan, totaling more than $7.1 billion. Another seven banks and brokerage firms named in the lawsuit are still fighting the accusations.

Mr. Lerach's prominence in securities litigation has led some people close to his camp to suggest that the United States attorney's motives for the investigation had more to do with politics than the practice of offering referral payments to plaintiffs and their lawyers.

Mr. Lerach is a generous contributor to Democratic politicians and last year his firm sued Halliburton, contending that the company defrauded investors by manipulating and falsifying its financial statements from 1998 to 2001. During most of that period, Vice President Dick Cheney was Halliburton's chief executive.

"The whole issue of referral fees is absolutely, clearly legal," said Edward W. Hayes, the lawyer representing Mr. Schulman. "I will not comment on whether there is a political motivation, but it's clear that the Bush administration and the California Republican Party hate class-action lawyers."

Lawyers involved in the case say that prosecutors hope that Mr. Schulman and Mr. Bershad, if they are indicted, will yield to pressure to provide evidence against Mr. Lerach and Mr. Weiss. But it is not clear whether they have any proof that their partners committed any wrongdoing.

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When reached by telephone, Mr. Lerach would not comment on the investigation. Mr. Weiss did not return a call to his office.

Calls to Mr. Bershad's office and his lawyer were not returned Tuesday.

In building their case against Mr. Schulman and Mr. Bershad, prosecutors appear to be relying heavily on information and testimony provided by Robert P. Sugarman, a former Milberg Weiss partner, Mr. Hayes said.

"There are individuals with a strong personal and financial motive to make false accusations against Steve Schulman," he said. "Sugarman was internally a competitor with Steve Schulman and he lost out on the internal competition."

"Sugarman had numerous personal problems with other members of the firm," Mr. Hayes said. "He left the firm and there are other very significant issues with him about which I am not prepared to comment on at this time."

Mr. Sugarman's lawyer, Michael Ross, would not comment on the investigation and a call to Mr. Sugarman's office was not returned.

Before its split in 2004, Milberg Weiss Bershad Hynes & Lerach was the dominant player in the class-action lawsuit arena. Avidly scanning for sharp drops in stock prices or strange announcements by companies, the firm's lawyers would often race to the courthouse with a plaintiff in tow to be among the first to file a lawsuit, hoping to grab the lead-plaintiff position.

Over the years, the firm pulled in billions of dollars in recoveries for shareholders by suing corporations for defrauding investors.

"When the two firms were together they were clearly the dominant law firm in the class-action securities-fraud litigation arena," said Joseph A. Grundfest of Stanford Law School, a former commissioner at the Securities and Exchange Commission. "They were the innovators and the market leaders. They were the equivalent of Microsoft."

The firm was so powerful that Congress enacted laws aimed at reducing the prominence of the firm and its star principals. In 1995, lawmakers approved the Private Securities Litigation Reform Act, which, among its provisions, required that large shareholders take over as lead plaintiffs in most suits. The thinking behind the law was that large institutional shareholders like state pension funds would not file frivolous suits.

Still, despite the legislation and the split, the two plaintiffs firms remained dominant in the field in 2005. Last year, they were responsible for 57 percent of the lawsuits settled, up from 52 percent in 2004 when they operated under one roof, according to data compiled by Cornerstone Research.

The firms associated with Mr. Lerach have made a very good living from the fees they reaped in their shareholder lawsuits. (As of last fall, for example, Mr. Lerach's firm had earned more than $680 million from the Enron case alone, according to a new book "The Money Lawyers.")

The investigation into Mr. Lerach's and Mr. Weiss's practices was begun more than five years ago after an ophthalmologist, Dr. Steven G. Cooperman, was convicted on art-fraud charges. A frequent plaintiff in shareholder lawsuits filed over the years by Milberg Weiss, Dr. Cooperman offered to provide evidence to prosecutors against Milberg Weiss in hopes of receiving a reduced sentence. A call to Dr. Cooperman's lawyer was not returned.

The investigation, though, seemed to cool off until last summer when the United States attorney's office in Los Angeles indicted Seymour M. Lazar, a Palm Springs lawyer and investor.

In their indictment in June against Mr. Lazar, prosecutors charged him with accepting "$2.4 million in secret and illegal kickback payments" from a New York law firm in exchange for serving as the lead plaintiff in several fraud suits. Milberg Weiss later identified itself as the law firm mentioned in the indictment. Mr. Lazar has indicated he intends to fight the charges.